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Schiff

Weider Health and Fitness is SHF’s largest shareholder, with a 34% economic interest and an 85% voting interest.

Since July 2007, SHF has made four payouts totaling $3.20 per share for an annualized total return of 10.1%. Unlike Buckle — which pays a regular dividend and has a small share repurchase plan — Schiff doesn’t pay regular dividends, and repurchases shares solely to offset dilution from executive compensation.

At the end of October, Bayer (PINK:BAYRY) offered to buy the company for $34 per share. Reckitt Benckiser (PINK:RBGPY) countered Nov. 16 with a $42/share offer, and Bayer ultimately dropped its bid on Nov. 20, sealing the deal for Reckitt Benckiser.

Schiff’s annualized total return since July 2007? A whopping 50.4%. Thanks to the recent takeover battle, its annualized total return increased by 15.8 percentage points in just three weeks. Excluding the takeover premium, special dividends accounted for approximately 29% of its total return with capital appreciation generating the rest. The balance between dividends and capital appreciation isn’t nearly as pronounced as Buckle’s, but the total return is impressive nonetheless.

How to Put Special Dividends to Work

If you want to take aim at companies that use special dividends to push the needle, follow these four steps:

Go to Google (or another search engine) and search the words “special dividends,” then look for company announcements. Or go to the SEC website and do the same under the advanced text search, looking specifically for Form 8-K.

Next, use Morningstar or some other site that keeps track of dividends. Look for more than one payout over a three-to-five-year period.

Finally, confirm that the stock in question has a large shareholder (more than 20%) that isn’t a mutual fund company or some other institutional investor.

Do you homework on the financial condition of the company and its prospects for the long-term. If everything checks out, buy-and-hold for three to five years (or longer), and enjoy the extra boost to your portfolio’s returns.

There’s an argument to be made that special dividends only attract temporary investors who come for the quick return, then go away once the dividend has been paid, making the distribution a waste of money. While I’m sure this happens a fair bit, it’s also true that a stock’s share price will be readjusted by almost the exact amount of the dividend.

Buckle paid a $2.25 special dividend in October 2011 along with its regular quarterly dividend of 20 cents. Its stock opened $2.39 lower the day after the payment. In other words, the dividend gain is erased by the drop in share price, rendering the temporary investor’s bet a case of arbitrage, where he or she believes the news of the dividend will deliver capital appreciation greater than the amount of the special dividend.

That’s a mug’s game.

In my opinion, the special dividend — when used effectively — is the best way to deliver investor returns over the long haul. Shareholders of Buckle and Schiff probably would agree.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.